Questions Answered About Annuity Insurance Policy

Q-1 What are the tax benefits of buying an annuity plan?

Ans- Money invested in an annuity plan is tax-exempt. One can withdraw 25-33% of the annuity, and this amount is exempted from tax. However, income on the plan is taxed under the income tax rate. In the case of a senior citizen, a tax is not applicable if the income is below the tax slab limit. However, if any senior citizen has taxable income then advance tax provisions will be applicable.

Q-2 What investment options do annuities have?

Ans- It depends on which type of annuity you have. If you choose a fixed-rate annuity, you are not responsible for choosing the investments – the insurance company handles that job and agrees to pay you a pre-determined fixed return.

When you opt for a variable annuity, you decide how to invest your money in the sub-accounts (essentially mutual funds) offered within the annuity. The value of your account depends on the performance of the funds you choose.

Q-3 What if I decide to withdraw the money from the plan?

Ans- Withdrawing money from an annuity can be a costly move, so make sure you review your plan’s rules and government policies before you do. If you withdraw before attaining a certain age then the withdrawals will be taxable. You will also have to pay a surrender charge to the insurance company ranging between 5-7% if your withdrawals come within the first five to seven years of the policy.

Q-4 What happens to my annuity after I die?

Ans- It depends on the type of annuity and how your payouts are calculated. There are several methods.

You do have the option of naming a beneficiary on your annuity, and with certain types of payout options, that beneficiary could receive the money in your annuity when you die. Another option is that just pay out during your lifetime, and the payments stop when you die.

Q-5 How do I know the company will honor my future payments?

Ans- It is possible you could lose your money if the insurance company you invested with goes bankrupt. So it is essential to purchase annuities only from insurance companies that you’re confident will be in business when you retire.

Check the insurer’s credit rating, a grade given by credit rating agencies such as- ICRA, CRISIL, CARE ratings etc. which expresses the financial strength of the company.

Q-6 What if I bought an annuity I no longer want?

Ans- You can ask to surrender the annuity. If you have owned the annuity for less than seven years or so, you may have to pay a surrender charge of around 7% or you can exchange it for a new one.

Q-7 Is the Fixed Indexed Annuity plan a stock market investment?

Ans- No, the Fixed Indexed Annuity plan does not participate in any equity/ stock investment. It invests in the equity-based index.

Q-8 Is there a high risk involved while opting for the Fixed Indexed Annuity plan?

Ans- No, there is minimum risk involved while opting for the Fixed Indexed Annuity plan since it is based on an equity-based index and regardless of the index performance, the contract value will not fall below the minimum amount specified in the contract.

Q-9 What is the difference between an Annuity and Pension?

Ans-The primary difference between Annuity and Pension is that-

A pension is the financial benefit individuals receive after they have attained retirement age. An annuity is also a pension scheme but there is no need for a person to get a retirement from service for availing of it.


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